Investment fraud scams to look out for
Discover common investment scams and useful tips to keep you and your assets safe
Updated 
6 min. read
As technology advances, so has the level of sophistication in investment fraud. While we have to keep vigilant about new types of fraud schemes, we also have to be mindful that the old ways still succeed in separating us from our hard-earned money, too. Let's look at just a few examples of investment scams to remind us to always be on guard.
Fraud Related to Humanitarian Crises
Whenever a humanitarian crisis grabs the attention of the world, such as the Russian invasion of Ukraine, many people feel compelled to help. Some may volunteer on the ground, others may provide help through financial means. And anytime money, urgency, and emotions are involved, cybercriminals are eager to take advantage of us. Phishing scams that look like donation links but are really schemes to keep the money you donate (or worse, compromise your bank account), can prey on our sense of urgency. The fraudsters know that our guards may be down as our focus is drawn by the human suffering and desire to help. Today, in a world where financial innovations are exploding, the news that millions of dollars had been raised to contribute to Ukraine’s war efforts through the sale of an NFT of the Ukrainian flag may prompt fraudsters to copycat this new type of fundraising tool.
Deciding to make a spur of the moment contribution to a cause that moves you is a great thing, but that’s why it is especially important to double check that the money you want to donate is going to the place you intend.
Pump and dump schemes
The pump and dump scam is one of the oldest investment scams around. The "pump" refers to the generation of excitement around a specific investment to help increase demand and drive up the price. Generally, investments that are selected for pumping are thinly traded, like penny stocks, so that any small increase in trading activity can have an outsized effect on the stock price. The "dump" refers to phase of the scam where the fraudsters unload all of their positions on people who have been lured in by the recent, strong price gains. Once the fraudsters sell off all of their shares, they've collected an inflated amount of money built on nothing more than short-term, drummed up hype. After they stop promoting the stock, the share price can fall just as fast as it increased. The innocent investors may be left with shares of investments that can lose much, or all of their value. These scams are illegal and should be reported, but they still happen because it is so difficult to prove that someone caused the change in value on purpose.
Pump and dump schemes in the crypto world
The general pump and dump scheme has found a new home in the growing world of cryptocurrencies. CoinMarketCap.com lists more than 17,454 "cryptos" as of February, 2022 but it’s important to note not all cryptocurrencies are created equal.
A group of fraudsters could privately agree to buy a certain cryptocurrency with low volume and high volatility, while also agreeing on an exit strategy once they have driven up the price by making false statements about how great the coin is. Or, they might spend a lot of money paying influencers to hype up the coin. Since there are many investors who will buy cryptocurrencies based on social media hype alone, the influencers may unwittingly be playing a part in the fraud. Once there's enough hype created the scammers sell off all their holdings at a profit, leaving late-comers holding worthless assets.
Crypto rug pulls
A modified version of the pump and dump scam in the crypto world is known as a "rug pull". This is similar to a pump and dump, but adds in an additional layer of the scammers running off with all the investors’ money directly with almost no chance for the investors to even sell out at a reduced loss. The pump phase still hypes up an investment and drives up the prices, but when a token is traded on a decentralized exchange with an automated market maker executing trades via smart contracts, the liquidity of the token can be completely removed by scammers, rendering the token effectively untradeable. One of the most well-known examples of a token rug pull was the SQUID token which was a cryptocurrency that was advertised as being based on the popular Netflix series "Squid Game" and reached a price of US$2,850 before a rug pull was executed. The coin crashed by almost 100%.
Boiler rooms and NFT scams
A boiler room was a term for an old-fashioned call centre where employees were encouraged to try selling products or stock options over the phone. The salespeople often used high pressure techniques like lying about how much interest there was for a certain investment, or how much you'd lose out on if you didn't invest right away. Their commissions for selling some of these investments could sometimes be ten times the commissions charged for regular transactions. They would also employ telemarketers who would make contact with people by dialing random numbers from phone books or other databases of names and addresses. There could even be multiple locations working together in what was called a boiler room network.
With the internet, boiler rooms have moved online and taken on new forms. They can now be found as forums or chatrooms on different websites where scammers can easily find potential victims. And because it's easier than ever to contact people all over the world, the scams are becoming more widespread and harder to track down.
Recently, non-fungible tokens (NFTs) have been gaining popularity with both investors and collectors. This new technology allows users to create digital asset certificates that prove authenticity of ownership of various items (digital or otherwise) that can be traded or sold on the internet. However, many fraudsters are taking advantage of this new ecosystem by creating fake NFTs to steal funds from unsuspecting victims who might be interested in limited edition, genuine NFT projects, as just one example. One of the new forms of investment scam involve Discord direct messages. When a popular NFT project gets sold out of an original minting, scammers can target members in the NFT project Discord channels with offers of getting in on an "extended" limited edition minting of extra NFTs in the project. Of course, this extended minting run doesn't exist at all. They send a link to process the transaction and while you give up your money, you don't get anything in return. Except regret and almost no recourse to get any funds back at all.
Using listed securities to access crypto investments
One way to avoid getting caught up in scams that prey on innocent and unexperienced investors who may not have researched individual stocks, cryptocurrencies, or NFT projects, is to instead consider regulated investment funds like ETFs and mutual funds that specialize in these areas. While they are all still volatile asset classes and can post large gains and losses, using well known fund managers who have access to teams of analysts to perform due diligence can help reduce the risk of fraud while still getting you access to these alternative investments.
For those who want to invest directly, remember to keep your guard up while investing and do your research. You may want to make a special point to do some "opposition research" in which you try to take the skeptical view of an investment to try and identify all the risks so that you don't only focus on potential upside and hype.
Ready to start investing?
Start investing online with BMO InvestorLine Self-Directed.
Have questions?
The opinions and views expressed in this presentation are those of the presenter and not necessarily BMO InvestorLine Inc. This presentation is prepared as a general source of information and is not intended to provide legal, investment, accounting or tax advice, and should not be relied upon in that regard. If legal or investment advice or other professional assistance is needed, the services of a competent professional should be obtained. Any information contained in this presentation does not constitute and shall not be deemed to constitute advice, an offer to sell/ purchase or as an invitation or solicitation to do so for any entity. The content of this presentation is based on sources believed to be reliable, but its accuracy cannot be guaranteed. BMO InvestorLine Inc. and its affiliates, sponsors and employees do not accept responsibility for the content and makes no representation as to the accuracy, completeness or reliability of the content and hereby disclaims any liability with regards to the same.